Updated: Mar 7
With the pandemic going full bore in many areas of the country, many real estate investors are asking whether or not it’s possible to find a “good deal,” and if so, they’re also looking for ways to make that deal work. Currently, buyers are looking for deals with depressed prices and discounts due to the pandemic, while sellers are looking to sell their multifamily properties without having to offer any substantial discounts. The reality is that when COVID just started, the market wasn’t a buyer’s market, nor a seller’s market, and some called it a “frozen market.” Today, we see more buyers and sellers engaged in deal making, and I am a firm believer that there are still good deals to be made, as there were pre-COVID-19, and there are also bad deals out there as well, just as there were pre-pandemic.
Some deals are openly marketed, while others are available off-market. If discounts are offered by a seller, they are generally minimal, often at 1% to 2%, for example. That amount generally isn’t enough to meet a buyer’s expectations, but it provides a talking point that can help to generate some interest. The good news is that you can still make a deal work during the COVID-19 pandemic if you think creatively.
So, what does it mean to work creatively when trying to make a real estate deal work during the pandemic? There are multiple ways you see and approach a deal in order to make them work. You can start by looking at the price. If sellers aren’t willing to reduce their price by a substantial amount, it may be that the deals are solid and resilient, which is something that you can’t say when looking at other asset classes like hotels or retail.
Of course, like any other investment there is risk with multifamily property investments, and risk has to be defined in order to determine whether you are buying at the right price. Fortunately, the risk isn’t as great as it was several months ago, when nobody knew what to expect after the pandemic hit. Now that we have a grasp of what the pandemic’s impact will be on the economy and on various classes of real estate investments, and there is less uncertainty, risk has been somewhat reduced.
If you see a deal that you think might work, and the price is close to what you believe is appropriate, there is a way to make the deal work if you really want it to happen. The key is to have the property in a strong location. Now is not the time to bet on a location or to be very aggressive. Instead, approach deals conservatively. It’s far more important to focus on the market’s median income, school districts, crime rate, and employment levels when looking at properties.
In addition, you should never compromise on your underwriting assumptions. You have specific metrics that you use when analyzing deals, whether those metrics are cash-on-cash, cap rates, projected rent growth or other analytics. Some investors tend to forgo their underwriting parameters in their desire to purchase a specific property, and they end up overpaying. For example, if you approach a deal now anticipating a 5% year over year rent growth, you’re going to be sadly disappointed. Due to COVID-19, a conservative rent growth of 0%-2% per year is far more realistic.
Another example is doing a value-add plan. Don’t expect to renovate 10 – 15 units at a time now, because you may not find enough tenants that can and will pay for an upgraded unit. Approach each deal and each aspect conservatively because now is not the time to be aggressive. Once the COVID-19 pandemic begins to resolve, things will change, but until then, be as conservative as possible. And even when you are conservative, there are ways to make deals work in today’s market.
3 Tactics That Can Help Make your Deal Work
1. Reallocate your Funds